August 2023
Resilient Economy Remains a Tailwind for Equities
August 8, 2023
Higher yields recently prompted some consolidation in the equity market, but we expect stocks to continue trending upward over the longer term if the economy remains resilient.
Growing expectations for a soft landing has driven this year’s stock rally, and there hasn’t been sufficient evidence to change that narrative.
In fact, the economy appears to be improving despite the Fed’s tightening. The New York Fed’s weekly economic growth index, which uses real-time rather than backward-looking data, has hit a year-to-date peak of 1.75%, versus a year ago.
The economy’s resilience to higher rates continues to catch economists off guard. U.S. GDP grew at a 2.4% annualized rate in the second quarter over the first three months of this year and was almost twice as high as estimates for 1.8%. Full-year market estimates have been increased as a result to 1.6% from 0.3% at the beginning of the year.
The stock market’s rally has broadened, as inflation trends down and economic growth continues. Cyclical sectors, which outperform when the economy is growing, have been market leaders since June. That’s in stark contrast to the first half of the year when market leadership was driven by growth and tech stocks.
August and September are seasonally challenging months for the equity market, so don’t be surprised to see bursts of profit taking over the next few weeks. However, we expect equities to maintain their overall ascent amid continued solid economic fundamentals and falling inflation.
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